Biggest drop in 60 years in US prices

US CONSUMER prices rose slightly in May, but over the past 12 months prices registered the biggest drop in nearly 60 years, allaying fears that inflation threatens an economic recovery.

The Labour Department said higher gasoline prices contributed to the smaller-than-expected 0.1 per cent rise in its Consumer Price Index (CPI) from April, when the CPI was unchanged from the previous month. Financial markets had expected a 0.3 per cent increase in May. Compared with the same period last year, the CPI fell 1.3 per cent, the largest decline since April 1950. The pace of the price decline also accelerated; the CPI dropped 0.7 per cent year-on-year in April.

The data soothed worries that massive spending by the US government and the Federal Reserve to pull the economy out of an 18-month recession may end up fuelling inflation.

“There is no sign that there has been widespread inflation because of the Fed’s quantitative easing regime. In fact, long-term inflation expectations have not budged and the Fed is still ahead of the curve on inflation,” said John Canally, an economist and investment strategist at LPL Financial in Boston.

A separate report from the Commerce Department showed the deficit in the US current account, the broadest measure of the United States’ international trade, shrank in the first quarter to $101.5 billion, the smallest gap since the fourth quarter of 2001.

The Labour Department said core prices, excluding food and energy, also rose only 0.1 per cent in May, slower than April’s 0.3 percent monthly gain, as prices for tobacco and smoking products fell after surging for the last two months on the back of a federal excise tax increase.

It was the smallest monthly rise in the core CPI since December. The gain reflected a fifth straight monthly increase in new vehicle prices. Over the past 12 months, core prices have increased 1.8 per cent, a little slower than the 1.9 per cent rise in the period ended in April.

Some analysts said core inflation could still be considered uncomfortably high, given that the economy has been in recession for a year-and-a-half.

“We could have an inflation problem going forward, but it’s going to have to wait until we get a resuscitation of the banking system,” said Howard Simons, a strategist at Bianco Research in Chicago. “Once that happens, we could get an inflation shock.”

Petrol prices rose 3.1 per cent in May versus a 2.8 per cent drop in April, but the increase was mitigated by a 0.2 per cent fall in food prices. – (Reuters)